AAPL: Time is Ripe for ‘iPhone mini’ in China, Says Morgan Stanley

By Tiernan Ray

Shares of Apple (AAPL) are down $2.60, or 0.6%, at $457.56, after a report from Morgan Stanley’s Katy Huberty today suggested Apple’s prospects are looking up for selling a less-expensive model of the iPhone in China, what she’s referring to as an “iPhone mini.”

Huberty, who maintains an Overweight rating on Apple shares, writes that prices of smartphones in general are “stabilizing,” not falling, as some others opine.

Citing work by her colleague Jasmine Lu, who covers China hardware firms, Huberty writes “China smartphone prices stabilizing, contrary to consensus view, as smartphone users trade up and component shortages lead to less pricing erosion.”

Huberty offers a chart of that recent stabilization:

Huberty thinks the stabilization is important, because there may be precedent in Apple’s history for cheaper production introductions once prices stabilize in a market:

History suggests the market is ripe for a lower-priced iPhone in China. Apple launched its first $999 notebook in Oct 2004, the year PC price declines moderated (-4%) after declining -9% during the consumer Internet boom.

An iPhone Mini would triple Apple’s addressable market, writes Huberty, if perhaps priced at $330, or roughly 元2,000, perhaps adding another 20% of China’s market where today the iPhone is only affordable to perhaps 10% of the market there. Even at a lower gross margin of 40% or so, if an iPhone mini cannibalized existing iPhone sales it would add to Apple’s revenue and “gross profit dollars,” she writes. Huberty models, for example. Sales of 166 million units in fiscal 2014 without a mini, but perhaps 210 million wig mini sales included. That might boost iphonr revenue and profit for the year to $111.4 billion and $54 billion in gross profit, assuming a 49% blended margin, versus $102.5 billion and $52 billion in profit, on a 51% margin, without the mini.

Early 40% of 3G smartphones shipped in China today are TD-SCDMA, up from 25% a year ago. We see several catalysts for an official iPhone distribution at China Mobile: (1) Apple launches a lower-priced “iPhone Mini”, (2) TD-LTE licenses and number portability legislation in late 2013 or 2014, and (3) China Mobile more willing to subsidize high-end devices after its TD-LTE launch.

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There are 7 comments

FEBRUARY 19, 2013 1:34 P.M.

Ed Carney wrote:

Apple made about 32 billion more than Samsung last quarter right? And Apple had 39% margins compared to Samsung 15% right? And Apple sold 49 Million Iphones compared to 15 Million Samsung Flagship Galaxy right? And Samsung's "Gain market share" trick is just flood the developing world with cheap , free plastic entry "Smart phones" Right? And Samsung's newest G 4 phone, their big innovation is to put 8 cores of CPU int he phone, like most PC and laptops are doing now? Wow , earth shattering innovation until people realize the charge to run such a phone will last about 1 hour with usage? Where is the threat really?

FEBRUARY 19, 2013 1:52 P.M.

Ron wrote:

Time is ripe to Fire Cook's pathetic as-!

FEBRUARY 19, 2013 2:38 P.M.

Mister Pee wrote:

Apple has to build more stores in China. Lots more. Eventually the 5 will be the Mini. And: One rule though for hiring Apple store employees in China: You have to have coding skills and a blue Mohawk. In off hours the blue Mohawks must troll and spam all things Samsung and Google on the Internet. Drive the Samsung management into hiding in Japan the way they did during the Korean war. Just kidding. Someone in media should expose Samsung's questionable tactics. Unless they fear Samsung suing them the way it's gone for a stand up comic. Brother.

FEBRUARY 19, 2013 4:04 P.M.

Ron wrote:

Time is right to fire Tim Cook. What a USELESS CEO

FEBRUARY 19, 2013 5:38 P.M.

Anonymous wrote:

this article implies the stock movement is in respone to this note. Why?? calls for a cheaper ihone have been out for months.

while Cook has hinted at offeirng something to fill the need for a less costly device, there is no reason to believe this product is launching in the foreseeble future.

FEBRUARY 19, 2013 5:44 P.M.

Tom wrote:

Who the F put Cook in charge. What a mistake
of monumental proportions

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.